How to Avoid the “Valley of Death”

As a growth stage SaaS founder with $5–10M in ARR, you have much to be proud of. You have made it to a point <1% of all startups make it to. You have achieved product-market fit, real customers find value in your software, investors believe in your vision and you have grown from a few founders sitting at a kitchen table into a rapidly scaling team with org charts, all-hands meetings, and maybe even (virtual) company retreats! Looking back at the last 3–4 years, you have accomplished a lot and avoided many “near-death” moments. There’s a lot to be excited about.

But in the back of your mind, there is the next big looming hurdle to get through — the so-called “Valley of Death” that many a great SaaS startup has succumbed too. Somewhere in that $10–50M ARR range, many good startups destined for greatness peter out. Many things can happen. Maybe it’s existential: the market you were building for is not ready for your product, turns out to be smaller than expected or you are only able to appeal to a small segment. Perhaps the unit economics are not holding as burn ramps. Or maybe it’s a people issue: a key founder quit, or the leadership team just can’t scale.

Most of the time, however, the failure point post $10M ARR occurs when the GTM machine stops working. This post, which draws on my time advising growth-stage startups as a consultant and now as an investor, examines why this happens and what you, as a founder, can do to avoid the Valley of Death.

Sales Efficiency as a Key Symptom

I have previously written about the importance of capital efficiency for SaaS businesses (see here.) More specifically, sales efficiency is the single most-telling operational metric for growth-stage SaaS businesses. To get through the Valley of Death, you need to maintain a high growth rate. Maintaining a high growth rate can’t happen without dollars spent leading directly to the new ARR. Sales efficiency (as measured via magic number), directly measures the ROI of sales and marketing spend on growth. McKinsey’s SaaS Radar has some great data on sales efficiency by ARR stage:

Let’s unpack what is going on here a bit further. In that “honeymoon” $5–10M ARR range, things are working very well on a micro-level. You are post-PMF and scaling efficiently for a few reasons. Your sales team is small and nimble; you are either doing founder-led sales or have a few reps who you have personally coached and have been there since Day 1. They are intimately familiar with the company and product and have high incentives to perform. Much of the opportunities you are hunting are new logos in that initial use case you designed the product for. It’s often a perfect match so the sales are easy; you may even have a fair amount of inbound based on referrals from early customers or people in your network. You have the normal startup twists and turns, but overall, things are peachy.

But somewhere around $10–25M in ARR, the sales efficiency starts to go down-hill. Part of this is a result of being in the “early growth stage” — you have raised that first growth round (see here on how to do it) and have started to invest in more sales and marketing headcount. New AEs take a quarter or two to ramp, you have to build out a real SDR program and you’re starting to think about investing in SalesOps to marry action with data. But other root causes behind this phase of growth are more troubling: perhaps that initial use case is starting to show limitations, maybe the product is hitting certain failure points thereby creating more churn, or perhaps the return on acquisition channels is worsening.

As the saying goes, it can often get worse before it gets better. The $25–50M ARR range can often look even more problematic from a sales efficiency perspective. Maybe the GTM and sales motion is starting to mature but the rapid hiring (ahead of growth) is masking the improvements. Maybe there is something external like new competitors or the TAM ends up proving to be more challenged. Regardless of the root cause, this can be a tough stage to be in — particularly since you have likely been focused on sales efficiency for at least a year or two and are not seeing the fruits of your labor.

The good news is that, if you are able to get through the $10–50M valley of death, things typically start to look a lot better on the other side of $50M in ARR. Companies that breakthrough this threshold are usually benefiting from a hyper-optimized sales & marketing engine and are able to grow quickly and efficiently. The magic number for companies that get here, on average, is greater than 2 — meaning for every dollar you are putting into marketing and sales, you are getting more than $2 in new ARR.

So the question then becomes: how do you navigate this valley of death to the hallowed lands of $50M+ in ARR? The key is to focus on high-potential levers that can improve sales efficiency.

5 Levers to Improve Sales Efficiency

There are many ways to improve sales efficiency in that $10–50M ARR range but the below 5 are likely the highest leverage actions you can take as a founder to increase sales efficiency.

(1) Hire an A+ VP of Sales/ CRO

The single highest leverage point you have as a founder to manage sales efficiency through the valley of death is to hire a strong VP of Sales or Chief Revenue Officer. Your headcount on the sales side is going to balloon and you will need a leader who can run a tight ship and work efficiently with other departments. In an ideal world, you would find someone who has all the attributes below:

• He or she has lived through that $10–50M ARR window several times before and has built a career in your category or in a very close adjacent category (e.g. if you are a marketing SaaS startup, look for someone who was VP or SVP level at places like Hubspot, Marketo, Mailchimp, etc.) but is hungry to take on more ownership. This person would ideally have been a key leader in SaaS businesses that made it to $50M ARR, but if they were also with a company or two that failed to break-through that barrier that can also be useful in terms of lessons learned.
• The sales leader also needs to have been responsible for building (not just managing) sales organizations from teams of 5–10 to 50+ in the past. They should know the traits needed in each role from SDR to AE to Manager and how to hire on the right cadence. If they can bring people with them from prior roles, that “followership” can help accelerate ramp time. Importantly, they should also have a healthy perspective on other key roles that could be used to support the front lines such as SalesOps and Account Management. Sales Ops, in particular, is an important data-driven role that every strong sales leader values and puts into place early.
• The right VP of Sales/ CRO will also come in with a playbook on the sales process and the tooling required to build a robust GTM machine. They should know how to translate the product and sales knowledge living in your head into systematic policy and procedure that can be adopted by the broader organization. Beyond this, the sales leader should also have strong views on pipeline stage gating, pricing/ packaging, and people development.
• Lastly, and perhaps most importantly, a good sales leader is a magnet for other top sales talent — be it sales managers, AEs, SDRs, etc. Attracting a high-quality sales leader can accelerate the overall talent pool and help you get where you are going faster and with fewer “people issues” along the way.

(2) Be religious about tracking core GTM metrics

Sales efficiency and more specifically magic number, in the end, is what you are trying to optimize. However, in order to do that, you really need to be tracking at least a few more layers beneath on a quarter-by-quarter basis. My suggestion is to break the GTM machine into its 3 primary orgs: marketing, sales, and customer experience. And then track at least 2–3 of the core metrics that impact sales efficiency (in addition to everything else you are tracking.)

You should also strongly consider investing in sales analytics software. Some of our portfolio companies have had great success with tools like People AI (revenue intelligence), Clari (RevOps) and Aviso (AI-powered selling.)

(3) Drive towards product-led growth + digital enabled sales

Long sales cycles, uncertain payback periods and choppy sales motions can impact sales efficiency negatively as they drive up sales and marketing costs without the benefit of incremental ARR. This can become especially magnified, early on, if you are selling to large enterprise customers, making it difficult to do other things like attract outside investors, decrease customer concentration risk and build a scalable/ repeatable playbook.

On the flip-side, if you have a bottoms-up motion, it will be pretty hard to accelerate through $50M in ARR without moving upmarket. Moving up-market works best if you have a land and expand motion (and typically with a freemium business model.) This allows the sales team to automate SMBs and move them to a self-serve/high-velocity motion (digital enablement) while refocusing the core sales team’s efforts upmarket. Nevertheless, never completely lose sight of the SMB segment as they are your growth engine and can help spur organic, word-of-mouth growth.

Regardless of where your customer base is today, every company should be focused on driving growth via product. Even the largest of enterprises, with their long sales cycles and complicated procurement processes, will accelerate their processes if they are seeing rapid adoption of their products “bottoms-up” by their employees. I saw this happen firsthand in my time at McKinsey where Slack and Box eventually upended decades-long relationships the firm had with IBM and Microsoft in the messaging and file-management categories. PLG can be a powerful force for overcoming inertia.

Digital enabled sales, which take a few different forms, can also lead to higher efficiency. Sometimes it’s a paired-down offering distributed on a self-service basis. In other situations, it is low-cost marketing and sales funnel that results in an inside sales motion. In both cases, digital sales can generate greater pipeline momentum than direct/ field sales as well as help you appeal to a broader customer base. This has never been more true than today in a post-covid world.

(4) Get as close to consumption-based pricing as possible

A close cousin of the PLG + digital-enabled sales strategy above is to push your pricing model towards consumption-based pricing. Consumption-based pricing, when done right, is the most efficient pricing model because it allows the customer to naturally expand as they consume more with very little incremental sales and marketing spend on your end. Consumption-based pricing is also the most value-based pricing scheme you can offer, which means the pricing levels tie closely with incremental value delivered. This allows for close alignment between you and your customers.

Some of the most sales efficient (and fastest-growing) SaaS companies employ consumption-based pricing. I’m including a few of my favorite examples of effective consumption-based pricing below:

• Twilio: varies by product line but some examples are pricing based on the number of minutes to receive/make a call, number of SMS messages sent/received, etc.
• Digital Ocean: pricing is based on the volume of data/bandwidth and the amount of time virtual machines are active
• AWS: one of the original pioneers of consumption-based pricing, uses storage consumed (per GB) with volume discounts that come as you enter hire bands of data usage
• Clearbit: all plans start with a $20K platform fee but thereafter pricing is based on CRM database size, web traffic, and monthly contact creation
• Datadog: varies by product line but examples include per million log events, per 10k sessions, or per 10K test runs

(5) Work the up-sell and cross-sell

The final strategy for improving sales efficiency is to mine existing customers. Generating incremental expansion dollars from your customer base is far less costly than acquiring a new logo. And the evidence shows that companies that expand >25% of their customers benefit from higher sales efficiency:

An important point here is that there is a “goldi-locks” level of attention that ought to be placed on the expansion of existing accounts — roughly 10–25% of your sales team should be focused on current customers. More than that and you will start to see diminishing returns and the effort is better spent on new logo acquisition.

Concluding Thoughts

Scaling through the valley of death and getting to 50M ARR is certainly no easy task. Very few SaaS businesses have made it through this phase of growth and the pitfalls that come with the territory. But hopefully, a sharp focus on sales efficiency, combined with the utilization of levers outlined above, will increase your chances of success.

As always, please reach out with any thoughts or suggestions (@MrAllenMiller). I’d also like to thank Kris Rudeegraap (@rudeegraap), Preeti Rathi (@preet1rathi), Sam East and Bill Macaitis (@bmacaitis) for their help in reviewing early drafts of this and providing invaluable feedback.